Focus on house prices

House prices differ widely across OECD countries, both with respect to recent changes and to valuation levels. The change in the real housing price index compared to a year earlier is used to tell whether prices are rising or falling. For valuation, if the price-to-rent ratio (a measure of the profitability of owning a house) and the price-to-income ratio (a measure of affordability) are above their long-term averages, house prices are said to be overvalued, and vice-versa.

Using these indicators, housing prices in the OECD area as a whole are broadly in line with long-term averages, and rising by about 2½ per cent per year. In the euro area, prices are also broadly in line with long-term averages, but falling by about 2½ per cent per year. These area averages hide wide disparities across countries, however. OECD countries can be roughly placed into five categories:

Where houses appear broadly correctly valued. This category includes the Unites States, where prices have been rising for the past two years following a substantial correction; Italy and Spain, where prices are still falling rapidly; Ireland, where prices have recently started rising again; Switzerland, where prices have been rising for an extended period; and Denmark, where prices are roughly flat.

Where houses appear undervalued and prices are still falling or roughly flat. This category includes some European countries hit hard by the crisis, such as Portugal and Greece, but also Japan and Korea.

Where houses appear undervalued but prices are rising. This category includes only Germany, where strong growth in household disposable income combined with favourable financing conditions have boosted prices.

Where houses appear overvalued but prices are falling or roughly flat. This category includes some European countries where the post-crisis housing market correction appears to be fading, notably the Netherlands and Finland, but also Belgium and Norway, where there was little or no price decline following the crisis. While price corrections in these countries are necessary, they are also concerning as they weaken households’ financial health and potentially fragilize banking sectors.

Where houses appear overvalued but prices are rising. This is the case in the United Kingdom, Canada, Australia, New Zealand and, to a lesser extent, Austria and Sweden. Economies in this category are most vulnerable to the risk of a price correction – especially if borrowing costs were to rise or income growth were to slow.